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The Choice of a Health Insurance Company Based on its Incurred Claims Ratio

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There are 26 general insurance players in the market who sell Health Insurance plans and every plan promises to be better than the other. In this melee it is easy enough to get lost in the comparative advantages of the various available health plans. You might check the scope of coverage, the inclusions and Exclusions of the policy, the Premium rate and other relevant aspects but how many of us gauge the company’s performance? Even if we want to, do we know how to assess the company’s performance or do we blindly follow the brand name?

A health insurer’s performance can be ascertained based on a simple ration called the Incurred Claims Ratio. Though it might sound technically complex and difficult, this is a simple ratio which depicts the company’s performance in terms of claims settled against the premium earned. So, let’s study the ratio in details to understand it –

What is the Incurred Claims Ratio (ICR)?

The ICR measures the proportion of claims paid by a health insurance company vis-à-vis the amount of premiums earned by it. The ratio is calculated for a one-year Term in which the premiums earned and the claims made are considered. The ratio is published by the Insurance Regulatory and Development Authority (IRDA) every year.

How to calculate the ratio?

The ICR can be calculated with a simple formula which is:

ICR = (total amount of claims paid in a year / net premium earned in that year)

How to depict the ratio?

The ratio is expressed as a percentage. The ratio can be interpreted based on the percentage scoring where the percentage shows the claims settled and the margin is the profit made by the company.

As is obvious, the higher the ratio, the lower profits the company makes. A ratio above 80% indicates that the claims are being paid by the company diligently and the company is selling products which are liked by the customer. It improves the customer’s chances of getting his claims honored. On the flip side, it also indicates that the profits retained are marginal and as such, the company might be unable to build its reserves.

A ratio above 100% is bad news for the company though good for the customer. It shows that a higher proportion of Claim is being paid than the amounts of premiums earned. While the customer can enjoy the security of his claim being settled, the company is incurring loss and might be utilizing its reserve to meet the deficiency. Ultimately, the company may change the product, charge a higher premium to meet up the deficit or might be unable to meet future claims which would prove bad for the customers. a ratio below 30% is also bad because it means that the Insurer might be charging an inflated premium and making huge profits.

A ratio between 30% to 60% and even up to 70% is considered good because it shows that the company is able to retain reasonable profits. These profits would help in building the company reserves which would be able to bear bulk claims if they arise in any year. Moreover, a good reserve might also influence the company to charge a lower premium. So, it is an advantageous situation for the consumer on both the claims and the premiums front.

Thus, the ideal ratio should lie somewhere between 30% and 60% for both the company and the customer.

What are the ratios of different health insurers?

As per the current annual report submitted by the IRDA, the ICR of all the insurers for the year 2014-15 is presented below:

So, the next time you think of buying a health insurance plan, do spare some thought about the Incurred Claims Ratio of the company as well. Though the higher the better, a ratio between 30% and 60% is the ideal scenario and should be considered.